Achieving the PSE Growth Objective1
This section proposes an analysis of factors that could facilitate the achievement of the Plan Senegal Emergent (PSE) growth objectives. First, it contrasts the international experience of countries that have achieved growth and those that have built up debt by ramping up public spending without accompanying reforms. Then it analyses the challenges facing Senegal to derive three main messages: unleashing Senegal’s growth potential would require (i) strong action on supply constraints, such as the regulatory framework and business climate friendly to FDI and SMEs together with investment in human capital and infrastructure; (ii) reducing inequalities by expanding private employment opportunities in the formal sector, and bringing more equal access to education and health services; and (iii) planning for adverse shocks to ensure that enough fiscal space is preserved to sustain the PSE investment plan.
1. The Plan Senegal Emergent calls for Senegal to become an emerging market by 2035 and a hub for the region. The ambition is to make Senegal a key player in the region for a number of activities through better infrastructure, higher human development, and better governance. The plan sets to develop key sectors, such as agriculture, agribusiness, mining, and tourism. To achieve these goals, Senegal would need to accelerate its growth rate to the 7-8 percent range in the short-term, and sustain such rates in the medium term.
2. International experience suggests that the PSE growth objectives are feasible. Historically, growth accelerations have been a frequent yet unpredictable phenomenon. Nevertheless, growth accelerations driven by economic reforms tended to be sustained.2 Also, episodes of sustained growth and growth accelerations usually coincide with a sharp uptake of private investment and trade. However, macroeconomic volatility and external shocks are negatively associated with the duration of growth spells, while export product sophistication tends to prolong growth.3
3. For Senegal, achieving growth rates around 7-8 percent amounts to a structural break compared to past performances. The PSE projects economic growth to double the performance recorded in the past two decades. Over the period 1995-2013, economic expansion was modest and volatile with an average real GDP growth of 4 percent and a 1.7 standard deviation. These growth fluctuations are partly caused by uneven agricultural production, exogenous shocks, and most importantly, by major bottlenecks in the supply side of the economy that will need to be addressed for Senegal to achieve a balanced growth path.
4. This section proposes an analysis of investment, trade, and reforms as ways to achieve the PSE growth objectives. Senegal needs significant private investment, particularly FDI as well as investment in infrastructure and in human capital (education, health). At the same time, it faces significant supply constraints that hamper growth and development. Increased infrastructure spending, especially in transportation and power generation, is recognized as playing an important role in growth, and promoting regional and international trade. It can also help achieve social objectives such as access to clean water, education and health. In addition, the PSE also anticipates that unlocking these supply constraints could lead to a virtuous cycle of growth, whereby improved growth performance would increase revenue collection and, subsequently, increase fiscal space for investment spending without putting much pressure on the deficit or building up public debt.
A. International Experience
5. The underlying analysis is based on two sets of countries. The first set consists of high growth countries, which are identified based on average of annual growth in real purchasing power parity (PPP) GDP per capita and levels of real PPP per capita GDP in both 1990 and 2013. From this first set, and to facilitate drawing lessons on policy and institutional reforms, the analysis then focuses on 10 comparators which satisfy a number of additional criteria. The second set, high debt countries, is derived by applying a range of criteria pertaining to growth in debt position as well as the evolution of ratios of debt-to-GDP between 1990 and 2013 (see Annex 1).
6. Historically, countries that have embarked on important investment programs have experienced mixed fortunes. Between 1990 and 2013, about 46 countries have achieved an average growth in real purchasing power per capita GDP of 5 percent or more while another 43 accumulated debt without much growth to show for it. Of the 46 countries, the 10 comparators derived from the analysis are Cabo Verde, China, Guyana, India, Indonesia, Mauritius, Sri Lanka, Tunisia, Uganda and Vietnam.4
7. The successful countries emphasized measures to expand exports through more FDI while those that accumulated debt did not seem to do so (Figure 1). Indeed, comparators experienced sustained growth by relying on FDI-driven exports. During episodes of growth, and on average, exports increased by 20 percentage points of GDP for comparators while high debt countries, which include Senegal, saw no change in exports in percent of GDP during episodes of high debt. The FDI in percent of GDP followed a similar pattern during episodes of growth for comparators, rising from an average of 1 percent of GDP to nearly 4 percent of GDP in these 10 countries. Although Senegal has noticeably higher share of FDI in percent of GDP, during the episode of high debt, its growth declined. This is partly explained by the lack of a significant increase in private investment, both in percent of GDP and in percent of total investment. The sustained growth in comparator countries seems to also be underpinned by increases in private investment in percent of GDP as well as in percent of total investment. For Senegal to achieve PSE set goals, it would need to devise and implement a critical mass of reforms to encourage private investment, promote and expand its exports, unlock supply constraints and promote inclusive growth.
Figure 1.Senegal: Comparators versus High Debt Countries1
Sources: IMF staff estimates.
1 High debt countries, including Senegal, are listed in Annex 1 of this section. “Before Episode” and “After Episode” are 3-year averages of the series. “Before Episode” refers to 3 years before the start of a growth episode (for comparators) and debt episode (for high debt episodes countries). “After Episode” refers to 3 years before the end of a growth or debt episode.
B. Promote Exports and Export Quality, and Expanding to New Markets
8. As one of the 10 comparators, Mauritius is one example for Senegal to follow. Indeed, Mauritius achieved similar objectives as those of the PSE by promoting exports and by leveraging trade agreements. Despite poor natural resource endowments and high vulnerability to external shocks, the Mauritian story offers a remarkable example of how carefully orchestrated reforms, underpinned by the right institutional setup, can support successful structural transformation. In the post-independence era, Mauritius relied on preferential arrangement in the sugar industry and the Multi-Fiber Arrangement (MFA) preferences to promote exports of sugar and textile. Between 1980 and 2000, GDP per capita more than tripled to reach $3800 in 2000, while export increased more than tenfold to reach 60 percent of GDP in 2010. The economy expanded progressively from primary (sugar), to secondary (textile), to tertiary sector (tourism and financial services) to become an upper-middle-income economy today.
9. Senegal’s growth strategy could greatly benefit from an integrated and coordinated export strategy. Ultimately, the PSE aims at boosting exports to its existing partners and mostly to the neighboring countries in West Africa. This should happen indirectly by improving competitiveness and raising productivity. Less than one percent of public financing under the current plan will go directly to an export strategy per se. The Mauritius case study suggests that a well-calibrated activist trade policy could yield great results, including by leveraging trade agreements. More specifically, better coordination of export-oriented industries, better access to appropriate financing, facilitation of improvement in quality and other standards could boost existing exports. For example, despite a preferred access to the US market through AGOA since 2000, US imports from Senegal remain marginal (Figure 3). To emulate Mauritius and other comparators, Senegal would also need to address key supply constraints that partly limit its growth potential.
Figure 2.Senegal: Bilateral Goods Trade, United States-Senegal
Source: IMF staff estimates and projections.
Figure 3.Senegal: Real GDP Growth Projections Under Different Multipliers Assumptions
Source: IMF staff estimates and projections.
C. Unlock Supply Constraints
10. Unlocking supply constraints may take longer than expected because a critical mass of reforms needs to be in place before growth can reach the target. Since these reforms will take time to be enacted, this suggests revising the speed at which Senegal could reach a growth rate of 7–8 percent. According to the PSE, growth would rebound rapidly, within a year or two. It is expected that a “big push” with front-loaded public investment that crowds in private investment, including FDI, would lead to rapid gains. However, unlocking supply constraints is likely to take more time, as reforms to improve the regulatory framework and business climate for FDI and SMEs may take time. Moreover, undertaking new investment projects will take time to translate into effective productive capacity. A short-term growth rebound is unlikely to come from a demand effect related to increased public spending, because for developing countries, fiscal multipliers tend to be small, and sometimes even negative.5 The multipliers are low because demand-driven stimuli are hampered by constraints on supply. This is particularly likely to apply to Senegal where, inter alia, electricity, transport and human capital available to the formal private sector are all areas which require policy attention. Moreover, the large informal sector and low levels of FDI are outcomes of a poor business climate, which is in turn clearly signaled by the poor rankings of Senegal in the Doing Business Index of the World Bank. To illustrate this point, we simulated an alternative growth path using a production function, to see at what speed additional public investment expenditure would translate into higher growth performances (Figure 3).
11. The growth path in the PSE appears to be implicitly based on multipliers that are much larger than those found empirically. These are unlikely to materialize until reforms to address supply bottlenecks are implemented. Indeed, the production function suggests that the gains in terms of growth while more gradual, could indeed be significant over the medium term as reforms tackle the supply constraints. Furthermore, the potential gains could, in the long run, be even more significant than envisaged in the PSE. With the right reforms, improved business climate and sound fiscal policy Senegal could crowd in the private investment, particularly foreign investment inflows, which are required to achieve its growth potential in an inclusive manner.
D. Promote an Inclusive Growth
12. PSE policies aimed at promoting inclusive growth will be critical to make a higher growth rates sustainable. One critical challenge for many emerging or developing economies relates to the capacity to sustain growth over a prolonged period of time.6 Sub-Saharan African (SSA) countries would typically encounter growth periods of GDP per capita that, on average, last about 11–13 years, and are also 10–11 years shorter than growth periods encountered in advanced countries and fast growing emerging economies (see Berg, Ostry and Zettelmeyer, 2012). In addition, SSA countries’ growth periods tend to end with prolonged periods of negative growth (between about -3 and -7 percent). It has resulted in overall weaker growth performances, even if most of these countries did experience periods of high growth.
13. Senegal has relatively lower performances than the average SSA countries. First, continued growth periods of GDP per capita lasted only about 8 years, in Senegal and second, the average growth achieved was lower than the average for SSA. Comparing Senegal against 4 of the 10 comparators (which had a similar level of income per capita in the early 1990s but have achieved growth performances similar to those envisaged for Senegal in the PSE, over about 35 years), four critical factors appear to explain why countries enjoy prolonged periods of positive growth: income inequalities, trade openness, political institutions, (i.e. the democratic degree of regimes), and FDI (Figure 4).7 Three main stylized facts emerge.
Figure 4.Senegal: Factors of Prolonged Periods of Positive Growth
Source: IMF staff estimates.
For each variable, the height of the figure shows the percentage increase in spell duration resulting from an increase in that variable from the 50th to the 60th percentile, with other variables at the 50th percentile, except autocracy, which is not a continuous variable. For autocracy, the figure shows the effects of a move from a rating of 1 (the 50th percentile) to 0 (the 73rd percentile.) Source: Berg, Ostry, and Zettelmeyer (2008) and authors’ calculations.
First, Senegal has received relatively high levels of FDI during its growth spells. It underscores how attracting foreign investors will be critical to Senegal growth performance. In particular, continued improvements in the business climate will be essential to maintain and develop Senegal’s attractiveness. Here Senegal could do well to follow in the footsteps of Rwanda, which rapidly improved its business climate, and Mauritius, which strove to be in the top tier in Africa. Peer learning in this area has been supported by the World Bank and could be usefully explored.
Second, over the past decade, Senegal has made two considerable changes to its institutions that bode well for achieving PSE growth objectives. First, Senegal has become more integrated into the global economy with more open international trade and improved diversification.8 Second, Senegal has proven that its democracy functions well, with, for example, a peaceful political change during last general elections.9 Thus, Senegal has the basic pre-requisites for prolonged periods of high growth as envisaged by the PSE. Indeed, based on empirical results, with these two institutional improvements, Senegal could have achieved a prolonged period of growth of about 24 years, instead of 8 years.
Third, the main vulnerability that faces Senegal is the degree of income inequality. Indeed, comparing Gini coefficients between Senegal and comparator countries suggests that Senegal’s distribution of income is about 20 percent less equal. This has potentially a very significant impact on growth prospects. Applying the result of Berg, Ostry and Zettelmeyer (2012), if Senegal had had a similar distribution of income as that of 4 comparators, its growth spells could potentially increase further from 24 years to about 32 years, i.e. almost exactly the average length encountered by the 4 comparators countries.
14. Thus, when implementing the PSE, Senegal authorities could adequately focus on effective measures to reduce inequalities. In particular, policies that are usually the most effective to provide durable improvements to income inequalities are based on creating opportunities for private formal sector employment and investment in human capital, i.e. reducing inequalities of access to education and health services. On the contrary, direct subsidies, especially when they target producers (e.g., the electricity sector), are less likely to reduce inequalities as they poorly target the poor, and represent an opportunity cost in terms of forgone spending on health and education, which indirectly affects the poor the most.
15. Planning for contingencies will be critical, as potential risks to growth could complicate PSE implementation. Senegal faces risks to its growth pattern. An obvious risk relates to PSE implementation, and would require a timely implementation of reforms, so that the growth rebound materializes, thus creating the needed fiscal space for investment scale-up. But Senegal is also exposed to spillover risks, i.e. risks pertaining to the global economy and largely outside Senegalese control. Planning for these risks would be critical, as their potential impact on growth could derail PSE implementation. These risks can be quantified: based on the vulnerability exercise for Low-Income Countries (VE-LIC), Senegal could lose between ½ to 1 percentage points of growth (Figure)10 This could result in increased tensions on fiscal balances, by reducing the fiscal space available for investment. Mitigating this risk requires planning and prioritization, so that investment spending (both human and physical) critical to the PSE would not be jeopardized. Such planning could be based on (i) streamlining public expenditure, for example by a timely implementation of the electricity sector reform, as it will also reduce the need for electricity subsidies, and (ii) maintaining prudent fiscal and debt policies, so that Senegal could preserve its access to financing in case of an adverse shock. On the latter, the credibility of fiscal deficit and debt objectives could be increased by adopting rules to contain recurrent spending growth and/or developing fiscal councils to enhance the effectiveness of fiscal objectives. Moreover, such actions should reduce the cost of access to capital markets, further increasing fiscal space for investment in human capital and public infrastructure.
Figure 5.Senegal: Vulnerability to Spillovers from the Global Economy Real GDP Growth
Sources: Senegal authorities, and IMF staff projections.
High Growth Countries and Comparators
The list of 46 high growth countries is derived by from having an annual PPP per capita GDP growth rate of 5 percent or more between 1990 and 2013.11
From this list, the comparators are derived by applying the following additional filters:
1. The country had a GDP per capita in 2013 that Senegal could achieve over 30 years if the PSE succeeds in becoming an emerging market middle-income country (MIC), i.e. PPP per capita GDP between $5,500 and $9,80012;
2. The country has lower PPP GDP per capita than Senegal in 1990, but has reached higher PPP GDP per capita than Senegal in 2013,
3. The country’s export concentration is low (one third standard deviation below the mean) or has improved while remaining within two-third standard deviation above the mean.
Identification of Growth Episodes
From the list of high growth countries, growth episodes were identified using the following criteria:
1. Real GDP growth of 5 percent or more for at least 5 consecutive years.
2. No more than 2 years of deviations from growth trend within the 5 year period.
In figure 1, the variables are computed as follows: the value for “before episode” is a three-year average before the start of the episode while the value for “after episode” is a three-year average through the end of the growth episode.
High Debt Countries
The list of 43 high debt episode countries is derived by applying the following filter:
1. A country that experienced a growth in debt position of 2 percent per year consecutively for at least 5 years in trend, with no more than 2 years of deviations from trend consecutively within the 5 year period.
2. The country’s debt position exceeded 40% of GDP at some point between 1990 and 2013.
The variables reported in figure 1 for high debt countries, including Senegal, are computed as three-year averages before the start of debt episodes and through the end of the debt episode.
|High Growth Countries|
|Equatorial Guinea||Korea, Rep.||Ireland||Lao PDR|
|China||Dominican Republic||Ethiopia||Sri Lanka|
|Bosnia and Herzegovina||Mozambique||Ghana||Turkey|
|Macao SAR, China||Albania||Uruguay||Middle income|
|Estonia||Mauritius||Hong Kong SAR, China||Mongolia|
|India||Trinidad and Tobago||Belarus|
|Comparators: Growth Episodes|
|Cabo Verde||1993||2003||India||1994||2011||Sri Lanka||2005||2012||Uganda||1999||2013|
|China, P.R.: Mainland||1991||2013||Indonesia||1990||1997||Tunisia||NA||NA||Vietnam||1992||2007|
|Countries with High Debt Episodes|
|Antigua and Barbuda||1997||2004||Croatia||2008||2013||Jamaica||1999||2003||Serbia, Republic of||2008||2013|
|Barbados||1999||2013||Dominica||1997||2001||Macedonia, FYR||2008||2013||South Africa||2008||2013|
|Belarus||2005||2011||Egypt||2008||2013||Malawi||2007||2013||St. Kitts and Nevis||1996||2005|
|Benin||2006||2013||El Salvador||2008||2013||Malta||1995||1999||St. Lucia||1990||2005|
|Bolivia||2000||2004||Eritrea||2004||2008||Montenegro||2007||2013||St. Vincent and the Grenadines||1997||2005|
|Bosnia and Herzegovina||2007||2013||Gambia, The||2007||2013||Morocco||2008||2013||Suriname||1996||2000|
|Central African Republic||2000||2005||Grenada||1999||2013||Niger||2008||2013||Ukraine||2007||2013|
|Congo, Republic of||1990||1994||Honduras||2008||2013||Philippines||1998||2003||Yemen, Republic of||2008||2013|
BergA.J.OstryJ.Zettelmeyer2012 “What Makes Growth Sustained?” Journal of Development Economics98149–166.
HausmannR.L.PritchettD.Rodrik2005 “Growth Accelerations” Journal of Economic Growth10303–329.
IlzetzkiE.E.G.MendozaC.A.Vegh2010 “How Big (Small) are Fiscal Multipliers?” NBER Working Paper 16479.
KraayA.2010 “How Large is the Government Spending Multiplier? Evidence from World Bank Lending” The World Bank Policy Research Working Paper Series 5500.
Prepared by Ali Mansoor, Albert Touna Mama, Olivier Basdevant and Salifou Issoufou with assistance from Yanmin Ye.
Hausmann, Pritchett, and Rodrik (2005) found that growth accelerations are frequent but unpredictable. They also found economic reform to be a statistically significant predictor of growth accelerations that are sustained.
For volatility and duration of growth spells see Berg, Ostry, and Zettelmeyer (2012). For export product sophistication and growth duration see section 4 on “Growth, structural transformation, and export diversification in Senegal.”
This list only has 3 sub-Saharan African countries and contains China and India. An argument could be made that it may be unrealistic for Senegal to emulate countries like China and India. However, the purpose of the analysis is to identify countries that Senegal might want to emulate if it is to become an emerging market MIC in 30 years. It could do so by drawing on key lessons from policies and reforms that countries like China, India and the rest of the MICs comparators, have successfully devised and implemented to reach their present status.
Fiscal multiplier is defined as the overall impact on growth of a change in a particular fiscal policy instrument (e.g., a change in VAT rates). The survey by Spilimbergo, Symansky, and Schindler (2009) reports that fiscal multipliers in developing and emerging economies are between -0.2 and 0.4. Using World Bank lending data for 29 aid-dependent, low-income countries from 1985 to 2009, Kraay (2010) estimates that the output multiplier for government spending ranges between 0 and 0.4, but with estimates rarely significant. Based on quarterly data of government spending, Ilzetzki, Mendoza, and Vegh (2010) find that the cumulative, long-run multiplier for 24 developing countries is 0.18.
Berg, Ostry and Zettelmeyer (2012) define “growth spells” as periods of real GDP per capita growth of at least 5 years, identified as beginning with an upbreak of per capita growth in excess of a minimum of 2 percent and ending wither with a downbreak followed by a period of an average growth of less than 2 percent, or simply the end of the sample.
These 4 comparators are: Cabo Verde, Indonesia, Sri Lanka, and Uganda.
Senegal scored 0 on trade openness during its growth spell identified by Berg, Ostry and Zettelmeyer (2012), largely because Senegal marketing board, which was phased out in the early 2000s. Nowadays, Senegal trade is mostly liberalized, which would translate into a trade openness index value of 1.
During its identified growth spells Senegal had a much lower score in terms of democratic institutions, but has since made significant progress, highlighted by peaceful political changes, and a high score in the Polity IV index, similar to those of well established democracies (www.systemicpeace.org/polity/polity4.htm).
Risks to the global economy are still on the downside. For Senegal the two critical sources of spillovers are (i) a tightening of monetary policy conditions in advanced economies, which would reduce demand for Senegal products, and (ii) an oil price shock, following the recent turmoil in the Middle East, which would translate into a decline in oil production and protracted increase in oil prices.
In the October 2013 Regional Economic Outlook (REO), IMF staff identified six nonresource-rich sub-Saharan African countries (Burkina Faso, Ethiopia, Mozambique, Rwanda, Tanzania, and Uganda) that achieved real output growth (in national currencies) of 5 percent or more and real per capita GDP growth of more than 3 percent during the period 1995-2010. The methodology used in this note differs from that used in REO in three ways: (i) time period used is 1990-2013; (ii) the series used to determine average growth is PPP real GDP per capita; and (iii) the cutoff is 5 percent.
These are the lower and upper bounds if Senegal sustains an average annual growth rate of 4.6 percent and 7.6 percent. An exception is made for African MICs which have achieved a higher income level in 2013.